Corus left shoulder or the foothills?

STEEL COMPANIES ARE NOW THE DARLINGS OF THE STOCK MARKET

The current bidding by several contending parties to buy the Canadian steel producer Dofasco has highlighted the extraordinary turnaround in the value of steel company assets in the last couple of years.

Aside from privatisations, where special circumstances apply, it is hard to recall the last time that a steel company was the subject of a bidding battle between rivals anxious to grab its business and assets for itself. During the decades when steelmakers struggled to provide investors with a return on their capital, such takeover wars were rare.

Most recent steel company fusions – going back to the mergers that formed Corus, JFE and Arcelor, and the Mittal acquisition of International Steel Group – have been agreed deals, not contested takeovers.

Steel company amalgamations like these were usually based on cost-cutting and finding synergies. Industry executives were looking for ways to rationalise in order to reduce inefficiencies. Such mergers often led to plant closures, capacity reductions and serious job losses.

Now things have changed. Dofasco is part of other companies’ expansion plans. ThyssenKrupp and Arcelor are both increasing their production of slabs at low-cost locations in Brazil, and they need Dofasco as a captive consumer.

Many of Dofasco’s assets are good quality. It is an important supplier of high-value sheet and processed products – such as tailor-welded blanks and tubes for hydro-forming – to the North American automotive industry. This is a large, if hardly fast-growing, outlet for added-value steels. The company also has important shares of markets such as packaging steels which fit with the strategic objectives of both ThyssenKrupp and Arcelor.

Just as important, Dofasco has iron ore. Its subsidiary QCM produces more than 13 million tonnes per year of ore and pellets, and – in an era of high freight costs – it is well located to supply European steel mills. Dofasco also owns nearly 30 percent of Wabush Mines, a 5.5 million tonnes per year iron ore producer. With iron ore prices likely to rise again in 2006, such mining assets are valuable.

At the time of going to press, the outcome of the Dofasco takeover battle is not decided. ThyssenKrupp’s agreed offer to buy the company – which topped Arcelor’s earlier bid - does not close until January 10. That leaves plenty of time for Arcelor or another party to counter-bid.

Arcelor has an often-stated policy of not bidding for overvalued assets. But after losing out in the auctions for Turkey’s Erdemir and Ukraine’s Krivorizhstal earlier this year, it needs to find other targets. So it may still come back with a higher offer for Dofasco.

Other bidders may emerge. Nucor is known to have made informal approaches to Dofasco earlier this year. At least one major Asian steelmaker is rumoured to be interested.

If Dofasco does end up going to ThyssenKrupp, will the disappointed suitors look elsewhere in North America for steelmaking assets to buy? In the immediate aftermath of the bid for Dofasco, other regional mills began to look like takeover targets – consequently US Steel’s share price climbed by almost 40 percent and Nucor’s by 17 percent. Even AK Steel, which has high legacy costs and made a loss in the third quarter of this year, saw its shares rise by 24 percent on takeover speculation.

Steel companies the darlings of the stock markets – who would have thought it?

Source: MEPS - International Steel Review

She must be good luck as well as a darling ;-)